How the Dunning-Kruger effect will stop techies buying houses

Oh, and murder the economy as well

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By Jove, I think we've finally got an explanation for the unremitting horrors of so much of modern life - the way in which anything touched by politics, bureaucracy or officialdom simply turns to shite.

No, it's not simply the current shower of authoritarians who are in power, and it's not that they're all paid too much/too little. Nor is it even that they're all lying little toads: it's the Dunning-Kruger effect. This is the reason, to give one example, why they're trying to ban self-cert mortgages. That reason being, as Wikipedia tells us:

The Dunning-Kruger effect is an example of cognitive bias in which "people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it". The unskilled therefore suffer from illusory superiority, rating their own ability as above average, much higher than actuality; by contrast the highly skilled underrate their abilities, suffering from illusory inferiority. This leads to a perverse result where less competent people will rate their own ability higher than relatively more competent people. It also explains why actual competence may weaken self-confidence because competent individuals falsely assume that others have an equivalent understanding.

This, I think, explains it all. Consider the ban on self-cert mortgages recently proposed by the FSA: that office is stuffed full of people who think they know how to run The City. They haven't, in all actuality, proved all that good at it yet. Then again, neither have those who are actually working in it. However, we do have one other data point. Those in the FSA are, by definition, those not good enough, or not competent enough, to be making millions somewhere in the bowels of a bank. They are those only sufficiently competent to earn a pencil sharpener's salary, and that's why they are where they are.

Thus when you decide 18 months into your contracting life that you want to buy a house and find you cannot get the finance, you can nod knowingly and mutter 'Dunning-Kruger'. Those who made the rules were those who quite simply overvalued their own skills and knowledge, and thus made the rule that will trip you up.

Not that self-cert mortgages had all that much to do with what's just happened in the financial markets. Sure, there were indeed frauds, but that isn't what brought the system to its knees. That was down to everybody thinking that house prices would keep going up, right up until the moment that they didn't.

We also see exactly the same effect right across the activities of those who would rule us. Take, for example, the EU's insistence that hedge funds must now be regulated. Hedge funds didn't have anything to do with the crash or the recession, but those making the rules in the EU are sufficiently incompetent that they've decided that because there were lots of people making lots of money, they must have had something to do with it.

For another example, try this.

In the game of pass the parcel that was the securitisation of all those mortgages, the banks made one error which actually crippled them. No, it wasn't securitisation itself, and it wasn't fraud either. It wasn't even the fall in house prices. It was that they actually believed their own hype. These CDOs, these pools of mortgages which have been sliced and diced: they're safe! They can never fail! This is why they now have billions upon hundreds of billions of toxic assets swilling around.

If they hadn't believed their own sales pitches, if they hadn't actually held on to great swathes of these bonds, then they wouldn't all be bust. Sure, we would still have had a problem as house prices fell: the pension and insurance funds which ended up with them would have made losses. But boom and bust and investments rising and falling in value is something we can deal with: the entire banking system falling over isn't. The banks fell over because they didn't sell all those bonds.